There is a robust and growing body of evidence which shows a strong relationship between financial confidence and financial wellbeing. In the 2018 UK Financial Capability survey, financial confidence was strongly correlated with current financial wellbeing, and there were similar findings from national surveys in Norway and Canada. However, the exact nature of the relationship between financial confidence, behaviour, knowledge and skills remains unclear.
This review summarises the latest evidence on the complex and multi-directional relationship between financial confidence, behaviour and wellbeing – and concludes by considering how providers can improve financial confidence.
Several national financial capability surveys have developed distinct but overlapping measures of financial self-confidence, which are summarised in an accompanying ‘Measures of Financial Confidence’ document, and broadly cluster around three key concepts:
Some studies go beyond narrow measures of self-confidence, recognising that trust and confidence in the wider financial system fundamentally informs financial decision-making. Research by the OECD found that perceived ‘risks’ in the financial system – such as the risk of digital fraud or a lack of transparency – can undermine people’s confidence in the system, discouraging them from making financial decisions and choosing financial products. Further work is needed to understand how financial self-confidence interacts with confidence in the financial system to shape people’s behaviour.
Low financial confidence is more prevalent in financially vulnerable households, among young adults, particularly young women, BAME groups, unemployed people and private renters. Low levels of financial confidence are also seen among those with below-average financial capability (who tend to be under 35, single, social tenants, unemployed and with no educational qualifications). Perhaps unsurprisingly, financial confidence increases with age.
Several studies have demonstrated a link between financial confidence and current financial circumstance:
Surveys of Financial Capability in Norway and Canada found that a person’s experiences, circumstances and personality, as well as other psychological factors such as loss aversion (weighing losses as higher priority than equivalent gains) and inertia (capacity to act on an opportunity) all influence financial confidence. Levels of basic skills, including numeracy and digital skills, also shape financial confidence.
Unlike the strong correlation with wellbeing, financial confidence is only a moderate predictor of certain financially capable behaviours: active saving, keeping track and shopping around. Other enablers - including spending self-control, engagement with money, and engagement with the future - are stronger predictors of a wider range of behaviours.
Research by the OECD on Adult Financial Literacy found that people who rated their financial knowledge as being higher than average were fairly accurate in their assessment.
However, there is not a linear relationship between financial confidence and financial knowledge and skills. Money Advice Service research exploring the link between financial numeracy and financial capability found that a large group of the adult population (27%, 11.1 million) are over-confident when using numbers - having high levels of confidence, but low levels of numeracy. This is then associated with riskier financial behaviours: people who are over-confident in their numeracy skills tend to believe they can manage their money well, despite making poorer financial decisions and being less able to understand financial documents or make everyday money calculations.
The Money Advice Service’s ‘Right Place, Right Time’ research found that, in 37% of cases, people did not seek help when dealing with a life event because they were confident they could cope by themselves. This research demonstrated the critical role that confidence plays when people are deciding whether to engage with guidance.
The Money Advice Service’s What Works Fund has generated a significant new body of evaluation evidence about financial confidence. The findings below are mostly drawn from this evidence:
Crucially, these learnings are only applicable when beneficiaries acknowledge a gap in their skills, and actively seek guidance. However, low interest and engagement remain a critical challenge for providers of financial guidance, and this stems in part from issues of over-confidence: the key will be in learning how best to expose and tackle over-confidence, without switching people off to guidance.
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This Thematic Review was produced in collaboration with the Centre on Household Assets and Savings Management (CHASM) at Birmingham University, the University of Edinburgh Business School, Toynbee Hall and Ecorys UK.
